Tuesday, March 13, 2007

Incidentally

The IRS has released its new Statistics of Income Bulletin, and it contains some interesting data on who pays taxes in the country and how much.

Preliminary data for tax year 2005 indicate that taxpayers filed 134.5 million U.S. individual income tax returns, an increase of 1.6 percent from the preliminary estimate of 132.4 million returns filed for tax year 2004. Adjusted gross income (AGI) increased by 8.9 percent from the previous year to $7.4 trillion for 2005 and taxable income increased 9.5 percent to $5.1 trillion. The alternative minimum tax rose 31.6 percent to $15.9 billion, while total income tax increased 11.8 percent to $928.3 billion.

We're making more and paying a WHOLE lot more; this explains part of the decline in the budget deficit. And who is paying it?

For tax year 2004, taxpayers filed 132.2 million returns, of which 89.1 million (or 67.4 percent) were classified as taxable returns. This represents an increase of 0.2 percent in the number of taxable returns from tax year 2003. Adjusted gross income (AGI) on these taxable returns rose 9.0 percent to $6,266 billion, while total income tax showed the first increase in 4 years, rising 11.2 percent. Also for the first time in 4 years, the average tax rate for taxable returns rose, increasing 0.3 percentage points to 13.3 percent for 2004. Taxpayers with an AGI of at least $328,049, the top 1 percent of taxpayers, accounted for 19 percent of total AGI, representing an increase in income share of 2.2 percentage points from the previous year. These taxpayers accounted for 36.9 percent of the total income tax reported, an increase from 34.3 percent in 2003.

The data for Minnesota isn't as progressive as the federal tax return. This data -- soon to be updated, I am told, with data for 2004 tax year -- shows a small decline in effective tax rates for the top decile.

For 2002, Minnesota residents paid a total of $14.4 billion in taxes while earning $127.3 billion in total money income. Minnesota residents thus paid 11.3 percent of their total income in state and local taxes.

...Of the large state taxes, the income tax is borne almost entirely by Minnesota residents, who pay over 96 percent of total collections, but residents of Minnesota pay a lesser share, 82.4 percent, of the general sales tax. At the other end of the scale, Minnesotans pay only 10.9 percent of the property taxes on industrial property.

This is partly because of payments by non-residents, and also because of shifting of taxes between employers and employees, and between buyers and sellers.

Taxpayers in the top decile (incomes of $102,427 and over) bore 36.8 percent of the total tax burden while having 38.8 percent of total income. By tax type, taxpayers in the top decile paid 52.2 percent of the individual income tax, 28.0 percent of the consumer sales tax, 24.5 percent of the gross residential property tax, and 26.6 percent of business taxes.

This is important to understand. The income tax is plenty progressive, but the DFL is proposing returning the top income tax rate to 8.5%. They will argue that this is because the effective tax rate on the top 10% of income is declining. But that's because the sales and property taxes are being shifted as rich individuals are able to move income around to avoid taxation. Those us in the second-to-fourth deciles end up paying more because we have not the same means to shift where we receive our income.

If the DFL is concerned about that tax incidence, taxing high-income earners before may be counterproductive. Income generation of Minnesotans may be moved more to other states, like South Dakota, which have no income tax.